Kenya Listed Commercial Banks Analysis Cytonn Q3’2015 .… · • Kenya’sGDP grew by 5.5% in...

Kenya Listed Commercial Banks Analysis

Cytonn Q3’2015 Banking Sector Report

7th December, 2015

22

Table of Contents

I. Introduction to Cytonn Investments

II. Economic Review and Outlook

III. Kenya Banking Sector Overview

IV. Cytonn’s Banking Sector Report

A. Executive Summary

B. Banking Sector Report

V. Appendix

A. Metrics Used

B. Tier I Banks

C. Tier II Banks

D. The Board of Directors – Cytonn Investments

E. Management Team – Cytonn Investments

33

I. Introduction to Cytonn Investments

44

50 team members, one agenda – the client

2011

2012

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3

55

Introduction to Cytonn Investments

Cytonn Investments is an independent investments management company

2011

2012

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3

• Our mission is that “we work to deliver innovative & differentiated financial solutions that speak to

our clients needs”

• Cytonn Investments is differentiated in several respects:

1. Independence & Investor Focus: Cytonn is solely focused on serving the interest of clients, which

is best done on an independent investment management platform to minimize conflicts of interest

2. Alternative Investments: Specialized focus on alternative assets - real estate, private equity, and

structured products

3. Partnerships with Global Institutional Investors: Such as Taaleritehdas of Finland

4. Strong Alignment: Every staff member participates in ownership. When clients do well, the firm

does well; and when the firm does well, staff do well

66

Our Values

Our 6 core values help us drive a high performing culture

• To achieve our vision that “we will be Africa’s leading investment manager by consistently

exceeding client expectations,” we have key values which propel us forward:

People – We look for the best people who thrive in a team context

Excellence – delivering the best at all times

Client focus – putting the clients interest first at all times

Entrepreneurship – using innovation and creativity to deliver differentiated financial solutions

Accountability – every day we are committing our resources and reputation and we must be

accountable

Integrity – do the right things

77

Cytonn’s Corporate Structure – Kshs 50 bn under mandate

• Financial Services

• Education & HR

• Technology

• Diaspora platform

connecting investors

in the diaspora with

opportunities in the

East African Region

• Development affiliate

providing investment

grade real estate

development

solutions

Cytonn Investments

Cytonn Investments

Ltd

Cytonn Real Estate

Cytonn Diaspora

Cytonn Investments

LLC

• Independent

investment

management

company, serving

HNW & institutional

clients

• US advisory and

investment

management

company

Kenya United States

Private Equity

88

Board of Directors

The board is comprised of 9 members from diverse backgrounds, each bringing unique skill-sets*

Professor Daniel Mugendi Njiru serves as the Chairman of the Board of Directors

Edwin H. Dande,

Managing Partner & CEO

Elizabeth N. Nkukuu,

Partner & CIO

Patricia N. Wanjama,

Partner & Head of Legal

Prof. Daniel Mugendi,

Chairman

Antti – Jussi Ahveninen,

Non-executive DirectorMadhav Bhalla,

Non-executive Director

Nasser Olwero,

Non-executive DirectorJames Maina,


Mike Bristow,


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Strong Management Team With Diverse, Global & Local Experience

Diverse experience in investments, finance, real estate and legal, with deep commitment to client servicing*

Elizabeth N. Nkukuu,

Partner & CIO

Shiv Arora,

Head of Private Equity

Real Estate

Patricia N. Wanjama,

Partner & Head of Legal

Johnson Denge,

Real Estate Services Manager

Beverlyn Naliaka,

PR & Communication

Edwin H. Dande,

Managing Partner & CEO

Maurice Oduor,

Investment Manager

*For Bios of the Team, visit http://cytonn.com/the-team

Boniface W. Gichimu,

Finance Manager

Robert M Mwebi,

Project Manager

Winfred Ndung'u,

Business Administration

Manager

Gilbert Kibire

Real Estate Services Manager

Gaurang Chavda

Head of Private Wealth

Management

http://cytonn.com/the-team

1010

Cytonn Investment Solutions

We offer differentiated investment solutions in four main areas

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2012

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3

High Yield Solutions

The Team’s expertise and market knowledge enable us to offer investors higher yields than the

market average

Regular credit analysis, quick dealing capability and the large banking spread in the market

allow the team to capitalize on investment opportunities

Our unique strategic partnerships with Cytonn Real Estate, our development affiliate, enables us

to find, evaluate, structure and deliver world class real estate investment products for investors

Our platform connects global capital seeking attractive return with institutional grade

development opportunities in the East African region

Cytonn seeks to unearth value by identifying potential companies and growing them through

capital provision and partnering with their management to drive strategy

We primarily invest in the Financial Services, Education and Technology sectors

Private Regular

Investment Solutions

Private Equity

Real Estate Investment Solutions

We understand that investors have varying financial goals. Our highly customized and simple to

understand investment products will enable you to achieve your investment objective

We offer solutions to both local investors, and those in the diaspora interested in the

investment opportunities back in Kenya and the region

1111

24%

12%

9% 9%

0%

5%

10%

15%

20%

25%

30%

Real Estate 10-year Treasury Bond 91 day T-bill Equities (NASI)

Cytonn focuses on the highest returning Asset Class

Traditional investments returning 10% compared to 24% for real estate, & projected to continue

Pe

r a

nn

um

Re

turn

, 5

Ye

ar

Ave

rag

e

Average = 10%

1212

Opportunities in Real Estate - Representation of Listed Markets

Listed markets do not fully represent the Real Economy

• Only 49% of the economy is present in the listed markets, the balance of approx. 50% is in alternative markets which

includes property and private equity

• This leads to money chasing few opportunities due to limited options on stock exchanges; providing an opportunity for

sophisticated investors to make abnormal returns in the alternative markets

Ma

rke

t C

ap

to

GD

P

49%42% 39%

155%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

Kenya Uganda Tanzania South Africa

Target Area

Source: Cytonn Research

1313

Global view of economic growth determines regions of focus

There is demand from global capital (light colours) looking for attractive returns (dark colours)

1414

Key Themes driving our Property DevelopmentA large housing deficit, growth of the middle class and demographic trends are just a few on the factors driving our thematicinvestments in Real Estate

KEY THEME REAL ESTATE SECTOR PROVIDING EXPOSURE TO KEY THEME

Master Planned Communities

CommercialOffice Parks

CommercialMixed-Use

Suburban Malls

Three Star Hotels

1. Large Housing Deficit

2. Growth of Middle Class

3. Demographic Trends

4. Improved Infrastructure

5. Political Decentralization

6. Kenya as a Regional Hub

1515

Deal pipeline overview – 85% to low and mid-income housing

Kshs 49 Billion Deal Pipeline

Prime Residential and Mixed-use15%

Low to mid-income Housing85%

• Masterplanned Development

• Comprehensive Development

• Low to mid-income Modular Housing

• High Density Integrated Mixed-use

• Gated Communities

1616

Kshs 49 billion Deal pipeline details

all values in Kshs Millions unless stated

Projects Concept Project Size

SET 1

Amara Ridge Gated community 625.0

Situ Village Gated masterplanned community 3,050.0

Project Ruaka Middle-class residential development 1,600.0

Sub - Total 5,275.0

SET 2

Project Mombasa High density mixed-use development 3,750.0

Project Juja Middle-class gated community 3,832.0

Project Mount Kenya Masterplanned development 1,200.0

Project Mavoko Low to mid income masterplanned city 12,500.0

Project Lukenya Low to mid income masterplanned city 22,500.0

Sub - Total 43,782.0

TOTAL 49,057.0

• Set 1: Real estate projects where the design, concept, agreements and funding are all secured, and have ground broken or in

the process of ground breaking

• Set 2: Real estate projects where the Cytonn Real Estate team is in advanced stages of negotiations with the landowners, and

where consultants have been appointed to begin market research and concept design

1717

Cytonn’s strategy brings three key pillars together

Landowners

1. Creating Jobs

2. Growing the Economy

3. Improving the standards of living

Development CapabilityFinancing Capability

1818

II. Economic Review and Outlook

1919

Economic review

Kenya’s GDP growth to be supported by stable inflation and high infrastructure development

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12

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• Kenya’s GDP grew by 5.5% in Q2’2015 supported by high spending on infrastructure by the government and globally

low oil prices which boosts the manufacturing and the construction sectors since Kenya is a net oil importer. Kenya is

expected to grow by 6.5% in 2015 according to the IMF, and 5.4% according to the World Bank

• Inflation has remained stable during the year and within the CBK range of 2.5% to 7.5%. The inflation rate started the

year at 5.5% and moved to hit a high of 7.3% in November

• On the currency, the Kenya Shilling has depreciated by 12.6% YTD on account of;

(i) a strengthening Dollar globally and expectations that the Fed may increase rate,

(ii) a widening current account deficit driven by increased government spending on importation of capital goods to

support infrastructure development, and

(iii) declining foreign exchange inflows on the back of poor revenues from tea, horticulture and tourism

2020

Economic review… continued

Kenya’s 2015 GDP growth downgraded, owing to poor operating environment and higher debt burden

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• As of November, the import cover stood at 4.3 months which is marginally above the mandatory requirement of 4

months, having declined to a 27 month low of 3.9 months

• However the government is yet to utilise IMF credit facility of USD 688 mn, which can be tapped into to complement

the monetary policy in supporting the shilling

• We have seen a number of downgrades to the Kenyan economy. The IMF and World Bank reduced their forecasts to

6.0% and 5.4% respectively from close to 7.0% at the beginning of the year and recently the Treasury who

downgraded their forecasts from 6.9% at the beginning of the year to 5.8% noting (i) a tight monetary policy and (ii)

the El-Nino rains, whose effects would stifle growth

• S&P also downgraded the credit outlook for Kenya from stable to negative maintaining the credit rating at B+

We forecast 2015 Kenya GDP growth to come in at between 4.7% – 4.9%, below Treasury, IMF and World Bank forecast, as a result of the tough operating environment

2121

Key indicators point to a slow down in economic performance

Economic Outlook

Drivers Expectations - Jan 2015 YTD 2015 Experience Medium-term Outlook Effect

GDP5.0% - 6.9% growth in

2015

(i) 4.9% growth in Q1' 2015

Growth to be below target, with Cytonn's estimate for GDP at 4.9%

Negative

(ii) 5.5% growth in Q2'2015

(iii) IMF and World Bank downgrade their GDP projections to 6.0% and

5.4%, respectively

Interest Rates Low and stable

(i) CBR increased 300 bps to 11.5%Rates to remain high given

government’s heavy borrowingNegative(ii) 91 Day T-Bill hitting a high of

22.5%

InflationLow and stable at 6.0%

as at December(i) November inflation at 7.3%

(highest for year)Expected to surpass the 7.5%

upper limitNeutral

Exchange RateShilling to remain under

pressureShilling depreciated 12.6% against

the dollar YTD

Further depreciation given the increased foreign debt payments liabilities and Kenya’s structural

weaknesses

Negative

Corporate Earnings

Improve on credit expansion and a

favorable macroeconomic

environment

(i) Weak earnings from banking sector. Banks recorded slower growth in Q3’15 of 9.3% y/y compared to 13.1% in Q3’14

Weak earnings given the high interest rates and depreciating

shillingNegative

(ii) Weak shilling affected import reliant companies

Investor sentiment

Positive, supported by re-allocation of funds

from the Nigerian market

(i) Peaceful conclusion of Nigerian election resulting to re-allocation to

other cheaper markets

Negative on the back of anticipated rate hikes in the United States and attractive money market yields in the

country

Negative(ii) Increased flows into Kenya's debt market, however few flows into the

equities market

2222

III. Kenya Banking Sector Overview

2323

• In Kenya there are a total of 42 commercial banks, 1 mortgage finance company, 12 microfinance banks, 8

representative offices of foreign banks, 86 foreign exchange bureaus, 14 money remittance providers and 3 credit

reference bureaus

• All banks are regulated by the Central Bank of Kenya. The Capital Markets Authority has additional oversight over the

listed banks. All banks are required to adhere to certain prudential regulations such as minimum liquidity ratios and

cash reserve ratios with the Central Bank

• We maintain our view that Kenya is over-banked with a relatively high ratio of banks to total population, with 42

commercial banks serving of 44 million people, compared to Nigeria's 22 for 180 million and South Africa's 19 for 55

million

• Credit Information Sharing systems (CIS), agency banking, revised prudential guidelines and mobile banking are some

of the new developments in banking that have spurred increased efficiency in the sector, as well as enhanced

competition

1.0x

0.3x

0.1x

0.0x

0.2x

0.4x

0.6x

0.8x

1.0x

1.2x

Kenya South Africa Nigeria

Commercial Banks / Population (Millions)

Kenya’s Banking Sector Overview

Kenya currently has 42 commercial banks and 1 mortgage finance company

2424

Growth in the Banking Sector

Q3’15 had the most challenging operating environment characterized by high interest rates

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12

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• Year to date, the Banking sector in Kenya has continued to grow in assets, deposits, profitability and products offering,

leveraging on diversification to alternative channels, albeit in a tough operating environment, characterized by high

interest rates in Q3’2015

• The banking sector’s aggregate balance sheet grew by 1.4% from Kshs 3.6 trillion in June 2015 to Kshs 3.7 trillion in

September 2015. Gross loans and advances increased from Kshs 2.2 trillion in June 2015 to Kshs 2.3 trillion in September

2015, translating to a growth of 6.9%

• This growth has mainly been underpinned by:

Banks responding to the needs of the Kenyan market for convenience and efficiency through

alternative banking channels such as mobile, internet and agency banking

Branch network expansion strategy both in Kenya and in the East African community region

Increased use of alternative channels, such agency, mobile and internet banking. Cashless cards use

has also been on the rise

2525

Banking Sector Growth Drivers

Alternative service delivery channels to support banks’ growth and diversification

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12

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1) Cost containment initiatives: In the event that NIMs decrease due to the increase in competition, banks will opt for

more cost effective measures which ensure operational efficiency

2) Technology to drive growth from alternative service delivery channels: Mobile & agency banking have

increased banking penetration in the Kenyan market leading to a greater number of transactions and uptake of banking

services, particularly to the mass market. Launch of merchant cards to support cashless payments will be a key driver

for diversification within the mass market

3) Growth of the retail segment: As the middle-class grows rapidly in Kenya, faster than majority of the countries in

the region, there is an inherent increase in consumption expenditure and an increase in the percentage of the

population which will require banking services

4) Expansion both regionally and domestically: With devolution in Kenya, we will see banks become more

aggressive in trying to capture the opportunities that exist at county levels, which will increase their customer base. In

addition, banks looking to expand in the less penetrated markets of Tanzania, Uganda, Rwanda, South Sudan and DR

Congo are opening up new channels of revenue in countries with relatively attractive spreads compared to Kenya

5) Regulatory Environment: With the tightening of regulatory environment with emphasis on governance and

capitalization, banks are expected to remain stable and position themselves for growth

2626

Recent Developments in the Banking Sector

Banks continued to register lower than expected earnings growth

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12

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There were a number of developments in the banking industry;

1) Volatility in Interest Rates: In the third quarter of 2015, interest rates have remained volatile with the interbank

rate and 91-day T-bill touching highs of 25.8% and 22.5% respectively. At the beginning of the third quarter of 2015,

the MPC raised the CBR to 11.5%, and has kept it unchanged

2) Low Loan Uptake: Commercial banks have reported a lower loan uptake given the expensive costs of financing

loans. This was driven by actions by the Central Bank, which raised the Central Bank’s base lending rate by 300 bps in

the quarter

3) Lower earnings growth: Kenya banks have continued to record much lower earnings growth, driven by the

challenging economic environment which has reduced appetite for credit

4) Liquidation of Dubai bank: Dubai bank was placed under receivership with the Kenya Deposit Insurance Corporation

(KDIC) for failure to meet statutory requirements since July. The receiver manager, KDIC, further recommended that

liquidation was the only feasible option Dubai bank to be liquidated owing to the magnitude of weakness in the bank

2727

Recent Developments in the Banking Sector

Imperial Bank put under receivership

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12

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There were a number of developments in the banking industry;

5) Moratorium on the licensing of new banks: The Central Bank of Kenya announced a moratorium on the licensing

of new banks with the exception of cases related to amalgamation and acquisition of banks. With the number of

commercial banks at 42, this high number of banks comes with advantages such as enhancing financial inclusion but

also strains the thoroughness and diligence of the regulatory supervision

6) Imperial Bank put under receivership: Imperial Bank was closed and put under receivership, due to what was

described as unsafe and unsound business practices. The KDIC effected a joint agreement with Kenya Commercial

Bank and Diamond Trust Bank that allowed 89% of depositors access to their deposits to a maximum of Kshs 1 mn.

This is a clear indication that the bank will not reopen. This being the second bank to be closed within a period of 3

months, is an indication that there is a need to enhance the Risk Based Supervision in the banking sector by the

regulator

2828

Banking Sector Metrics

Robust growth in the banking sector as evidenced by constant increase in loans and deposits

Loans and Advances (Kshs Bn) Deposits (Kshs Bn)

CAGR-22.8%

Shareholders Equity (Kshs Bn)

CAGR-16.6%

CAGR -16.8%

Source: Central Bank of Kenya

Bank Branches

1,063 1,161

1,272 1,342

1,443

-

200

400

600

800

1,000

1,200

1,400

1,600

2010 2011 2012 2013 2014

CAGR - 7.9%

876

1,152 1,296

1,579

1,941

2,320

-

500

1,000

1,500

2,000

2,500

2010 2011 2012 2013 2014 Q3'2015

266 291

362

432

502

556

-

100

200

300

400

500

600

2010 2011 2012 2013 2014 Q3'2015

1,237

1,488 1,708

1,936

2,292

2,568

-

500

1,000

1,500

2,000

2,500

3,000

2010 2011 2012 2013 2014 Q3'2015

2929

Banking Sector Metrics, continued…

Loans to deposits ratio at 90.3%, up from 84.4% in Q2’15, showing more aggressive use of funds

Cost to income (%) Loans to deposits (%)

NPLs to total loans ratio(%) Net interest margin (%)

50.0%47.4%

40.1%43.7%

40.9%44.5%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

2010 2011 2012 2013 2014 Q3'2015

70.9%

77.4%75.9%

81.6%84.7%

90.3%

60.0%

65.0%

70.0%

75.0%

80.0%

85.0%

90.0%

95.0%

100.0%

2010 2011 2012 2013 2014 Q3'2015

6.6%

4.6% 4.8%5.2%

5.6% 5.4%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2010 2011 2012 2013 2014 Q3'2015

Source: Central Bank of Kenya

8.6% 8.7%

9.5% 9.4%

8.6% 8.7%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

2010 2011 2012 2013 2014 Q3'2015

3030

Banking Sector Multiples

Kenya’s banking sector is trading at an average PBV of 1.4x and a Trailing PE of 7.1x

Source: NSE, Cytonn Banking Sector Report

Bank Share Price *No. of shares

issued (bn)Mkt Cap (bn) PBV

TTM**P/E

Equity Group Holdings 41.8 3.7 154.5 2.2x 8.2x

Barclays Bank of Kenya Ltd 13.2 5.4 71.4 1.9x 8.3x

The Co-operative Bank of Kenya Ltd 18.0 4.9 87.8 1.8x 8.5x

Standard Chartered Bank Kenya Ltd 209.0 0.3 64.8 1.6x 7.7x

I&M Holdings Ltd 99.0 0.4 38.6 1.6x 7.0x

Kenya Commercial Bank Ltd 40.5 3.0 120.7 1.5x 6.7x

Diamond Trust Bank Kenya Ltd 201.0 0.2 48.2 1.5x 8.0x

CFC Stanbic bank 84.5 0.3 26.2 1.2x 7.7x

NIC Bank Ltd 43.0 0.6 27.5 1.1x 6.3x

Housing Finance Co. Kenya Ltd 22.0 0.4 7.7 0.8x 7.4x

National Bank of Kenya 15.6 0.3 4.8 0.6x 2.1x

Median 1.5x 7.7x

Average 1.4x 7.1x

* Share prices are as at 1st December 2015** TTM – Trailing twelve months

The Banking sector has become cheaper on a PBV basis having declined to 1.4x from 2.2x at the beginning of the year

3131

Banking Sector Multiples

Comparative look at Kenya financial sector shows banking stocks getting cheaper than insurance

Source – Cytonn Research

10 year Price to book value: Banking and Insurance

Between banks and insurance companies, we currently prefer investing in banks rather than insurance companies based on price to book valuation.

1.4x

2.2x

1.9x1.9x

1.5x1.4x

2.3x

2.0x

2.3x

3.1x3.1x

2.5x

1.7x

2.5x2.3x

1.7x

1.1x

0.8x

1.4x1.3x1.5x

2.5x

3.4x

1.7x

Nov-1520152014201320122011201020092008200720062005

Banking Average Insurance Average

3232

IV. Cytonn’s Banking Sector Report

3333

Executive Summary

Cytonn has undertaken this report to offer our investors a comprehensive view of the listed banks

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• All listed banks in the Kenyan market were analysed by the Cytonn Investment Team

• The analysis was brought about by a need to be able to recommend to our investors which banks are the most stable

from a franchise value and from a future growth opportunity perspective

• The analysis covers the health and future expected performance of the financial institution, by highlighting their

performance using metrics to measure profitability, efficiency, growth, asset quality, liquidity, revenue diversification,

capitalization and intrinsic valuation

• The analysis was undertaken using Q3’2015 results (franchise value) and analyst’s projections of future performance of

the banks (future growth opportunities)

• For banks which are part of a group structure, the financials of the group were utilised to take into consideration the

listed counter which an investor will purchase

• The overall ranking was based on a weighted average ranking of Franchise value (accounting for 40%) and Intrinsic

value(accounting for 60%)

• The top rankings were dominated by Tier 1 banks which performed well in terms of both Franchise and Intrinsic

valuation

3434

Rankings by Franchise value

We analyzed the listed banks on a franchise value perspective

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12

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• The bank ranking assigns a value of 1 for the best performing bank, and a value of 11 for the worst

• The metrics highlighted a bank’s profitability, efficiency, growth, asset quality, liquidity, revenue

diversification, capitalization and soundness

Bank

Loanto

Deposit ratio

Cost to Income ratio

ROACE* NIM**PEG ratio

P/TBVDeposits/

branch NPLs/ Loans

NPLCoverage

Tangible Common

Ratio

Non Interest

Income / Revenue

Camel Rating

***Total

Equity 2 8 3 2 7 11 9 5 4 3 2 4 60

Co-operative bank 1 5 7 4 6 9 7 4 5 4 5 7 64

Standard Chartered 5 4 1 3 11 8 2 10 6 1 8 6 65

Barclays 3 9 6 1 9 10 10 6 3 2 7 1 67

DTBK 8 3 9 7 2 6 8 1 1 9 10 3 67

I&M 9 1 4 8 4 7 4 2 9 7 9 5 69

KCB 7 6 5 6 3 5 6 8 2 8 3 11 70

CfC Stanbic 6 11 10 11 10 3 1 3 7 10 1 2 75

NIC 10 2 8 10 5 4 3 7 8 6 6 9 78

National Bank 4 10 2 5 1 1 11 11 11 11 4 10 81

Housing Finance 11 7 11 9 8 2 5 9 10 5 11 8 96

* ROACE - Return on Average Common Equity** NIM - Net Interest Margin*** Camel Rating incorporates a Governance score

3535

Rankings by Intrinsic value

The banks were also ranked on Intrinsic value perspective

Banks Current PriceTarget Price (Valuation)

UpsideDividend Yield

FY15eTotal Return

KCB 40.5 58.3 43.9% 5.3% 49.2%

DTBK 201.0 246.1 22.4% 1.3% 23.7%

Barclays Bank 13.2 15.3 16.2% 7.4% 23.6%

Equity bank 41.8 49.4 18.4% 4.8% 23.2%

NIC Bank 43.0 49.6 15.4% 2.7% 18.1%

Standard Chartered 209.0 228.5 9.3% 5.2% 14.5%

I&M Bank 99.0 108.8 9.9% 2.7% 12.6%

National Bank 15.6 16.1 3.5% 0.0% 3.5%

Cooperative 18.0 17.8 (0.7%) 3.5% 2.8%

Housing Finance 22.8 19.8 (13.0%) 5.1% (7.9%)

CfC Stanbic Bank 84.5 77.2 (8.7%) 0.0% (8.7%)

• KCB and DTBK have the highest upsides at 49.2% and 23.7%, respectively

• CfC Stanbic registered the highest downside of 8.7%

The target price is based on revisions in banks’ growth assumptions from H1 2015, majorly in;• Equity bank and Standard Chartered bank growth rates of 19.0% and 7.5%, down from 21.0% and 11.5%, respectively,• DTBK and National Bank growth rates of 18.4% and 15.8%, up from 15.6% and 8.7%, respectively; having outperformed our growth estimates

3636

Composite Bank Ranking

Overall, Equity bank was ranked 1st while Housing Finance was ranked last

Banks Franchise Value

Total ScoreTotal Return Score

Weighted Q3 2015 Score

Q3 2015 rank H1 2015 rank

Equity 60 4 26.4 1 1

DTBK 67 2 28.0 2 8

KCB 70 1 28.6 3 3

Barclays 67 3 28.6 3 4

Standard Chartered 65 6 29.6 5 2

Co-operative bank 64 9 31.0 6 5

I&M 69 7 31.8 7 6

NIC 78 5 34.2 8 6

CfC Stanbic 75 11 36.6 9 9

National Bank of Kenya 81 8 37.2 10 10

Housing Finance 96 10 44.4 11 10

• In Q3 2015, franchise value was assigned a weighting of 40% while the intrinsic value was assigned 60% weight, same

as in H1 2015

• Equity Bank maintained its top position ranking based on its robust franchise value backed by high return on average

equity of 29.2%, high net interest margin of 10.2% and a high non interest income contribution to revenue of 39.6%.

With the acquisition of ProCredit bank (Congo) and the roll out of Equitel expected to boost growth in the near term, the

stock has an upside of 23.2% (including dividend yield)

• Housing Finance ranked the lowest overall. It registered poor profitability, with ROACE at 12.6% and their NIM at 7.2%,

which was the third lowest in the market. In addition, they are hampered by liquidity issues, with a loan to deposit ratio

of 137.6%. The stock has a 7.9% downside

3737

Banking Sector Report Results

Diamond Trust Bank improves by 6 positions owing to higher growth rate

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• Diamond Trust Bank of Kenya rose 6 ranks to position 2 based on its second highest upside of 23.7%. This was boosted

by an increase in the banks’ growth rate to 18.4% owing to (i) their regional expansion strategy, and (ii) increased focus

on more efficient channels of distribution like agency banking. The banks’ high quality loan book and risk management

also boosted its franchise value

• Standard Chartered bank declined 3 ranks to position 5 based on its increase in non performing loans that brought down

its NPLs / Loans ratio which the bank did not provide as much for thus affecting their NPL coverage and also bringing

down their CAMEL rating score. In addition, the reduction of the bank’s expected growth rate reduced the stock’s total

return score, with the stock having an upside of 14.5%

• Barclays Bank ranked the third highest overall, having the highest net interest margin attributable to the more expensive

loans, yet sticky customer base. The stock has a 23.6% upside mainly attributable to their aggressive entry into the SME

market

• National Bank of Kenya, was the second most inefficient bank in terms of cost containment, operating at cost to income

ratios of 56.9%. In addition, they have the lowest quality of assets in their loan portfolio, as can be seen by their NPLs

which are 8.8% of their total loan book

3838

Future of the Banking Sector

The future is bright for the banking sector given the resilience to maintain margins

20

13

• Going forward we expect banks’ net interest margins to remain depressed, and the only way for the banks to drive

revenue is by diversification to increase their non funded income. The ability of the banks to diversify their top line

helps reduce risks in uncertain and volatile economic environments

• Alternative channels of distribution, such as mobile and internet banking, agency banking and cashless (cards) banking

will continue to drive growth in non-funded income while keeping costs low for most banks

• From the recent closure of Dubai and Imperial bank, we expect an enhanced risk-based analysis and supervisions for

commercial banks, and indeed all financial institutions, in Kenya by considering factors other than financial ratios

3939

V. Appendix

4040

A. Metrics Used

4141

Banking Sector Report – Metrics Used

Cytonn has undertaken analysis of the listed banks in Kenya using 11 key metrics

20

12

20

13

• Net Interest Margin - A bank’s net interest margin (NIM), is the difference between the interest paid on deposits and

the interest earned on loans, relative to the amount of interest-earning assets with higher net interest margins translating

into higher profits

Output:

Majority of Bank’s funding is towards the issuing of loans rather than the purchase of government securities. Even with

the introduction of the KBRR and the raising of the CBR to 11.5%, we expect banks to maintain their NIMs in 2015.

Barclays had the highest NIM at 10.93%, with the lowest for CfC Stanbic at 6.32%

• Return on Average Common Equity - A bank’s return on average common equity (ROACE), is the amount of profit

the bank earns as a percentage of average common shareholders’ equity. It’s a profitability measure that shows how

much a company generates with the money shareholders have invested

Output:

Banks with higher ROACEs are better at utilizing capital to generate profits. National bank has the highest ROACE at

30.1%, which was much above the industry average of the listed banks of 22.7%, while Housing Finance had the lowest

at 12.6%

4242

Banking Sector Report – Metrics Used, continued…


20

12

20

13

• Price/Earnings to Growth Ratio - The price/earnings to growth (PEG) ratio is the stock’s market price to earnings ratio

divided by its growth in earnings for a specified period of time. The PEG ratio is used to determine the value of a stock

while taking into account its growth rate, with lower PEG ratios showing the stock is undervalued given the growth in its

earnings

Output:

To obtain this ratio, we estimated each bank’s 5-year growth rate based on analysis of (i) bank’s fundamentals, (ii)

projections using each bank’s models and (iii) management’s input on a bank’s strategy going forward. National Bank of

Kenya had the lowest PEG ratio at 0.2x, while Standard Chartered was the most overvalued at 1.6x

• Deposits per Branch - A bank’s deposits per branch shows the amount of deposits a bank collects from each of its

branches, hence a measure of efficiency. Banks with higher deposits per branch are preferred, as it shows for each unit

cost of capital expenditure required to open new branches and their subsequent operating costs, a bank receives more in

deposits

Output:

CFC Stanbic and Standard Chartered have the highest deposits per branch at 4.7 bn and 4.5 bn, respectively, while

Barclays bank and National bank have the lowest deposits per branch at 1.3 bn and 1.2 bn, respectively. This is due to the

large corporate book of CfC Stanbic and Standard Chartered

4343



20

12

20

13

• Loans to Deposits Ratio - A bank’s loans to deposit ratio (LDR) is a measure of liquidity as it shows how much of a

bank’s loans are being funded by its deposits. Low LDR ratios indicate that the bank may not be earning a lot of interest.

Very high LDR’s indicate that the bank might not have enough liquidity to cover any unforeseen funding requirements,

and ratios above 1 show that the bank supplemented their loan issues with outside borrowings

Output:

Our analysis showed us that in Kenya, the loan to deposit ratio has been steadily increasing, showing increased uptake of

loans and more aggressive use of deposits by banks. Taking a preferred LDR of 85%, we found that Co-operative was

closest to the target at 83.8%, while Housing Finance was the farthest at 137.6%

• Cost to Income Ratio - The cost to income ratio is a measure of a bank’s efficiency, showing its costs in relation to its

income. A lower ratio is preferred, as it indicates a bank is more profitable. An increase in the ratio often highlights

potential problems as it shows a bank’s costs rose faster than its income; while a fall in the ratio could be brought by

management’s cost cutting measures

Output:

We see many Kenyan banks making an effort to be more efficient. Many Kenyan banks have opted to restructure in a bid

to bring down costs and subsequently this ratio, most recently being Co-operative which was able to bring its cost to

income ratio down to 49.0%, in line with the industry average. I&M maintained the lowest cost to income ratio of 34.4%,

while CfC Stanbic had the highest ratio at 59.0%

4444



20

12

20

13

• Price to Tangible Book Value - This is a valuation ratio that expresses the bank’s market price to its tangible book

value. It shows the price an investor would pay for a unit amount in the event of a liquidation. A ratio of less than one

indicates that the bank’s assets are undervalued in the market while a ratio greater than one signifies overvaluation

Output:

We find National Bank maintained its position as the most undervalued bank as per this metric at 0.7x, while Equity bank

is still the most overvalued at 2.4x

• Tangible Common Equity Ratio - This is the ratio of a bank’s common equity less intangible assets to its tangible

assets. It is a common indicator of a bank’s risk and capitalization and measures how much losses a bank can take before

shareholder’s equity is wiped out, hence solvency

Output:

Standard Chartered is the most solvent with a tangible common ratio of 16.8%, while National Bank was the least solvent

at 6.0%

• Non-Performing Loans to Total Loans Ratio - This is a measure of the percentage of a bank’s issued loans that are

non-performing that is, in default, or close to being in default

Output:

Diamond Trust bank had the highest quality loan book with a non-performing loans to total loans ratio of 1.6%, while

National Bank had the highest non-performing loans at 8.8%

4545



20

12

20

13

• Non-Performing Loans Coverage - This is a credit quality metric that measures the credit risks for banks. It shows the

extent to which the NPLs are covered by provisions hence the degree of stability of the bank’s lending base, with higher

ratios preferred

Output:

Diamond Trust Bank has the highest provisions to non-performing loans at 77.8%, while National Bank has the lowest at

8.9%. This is ironic given that DTBK has the lowest NPLs/ Loans of 1.6% while NBK has the highest NPLs/Loans of 8.8%

• Non-Interest Income to Revenue - The non interest income is the income earned from sources other than loans and

investments. The non-interest income to revenue therefore shows the extent of diversification of a bank’s operations.

High levels are preferred, not exceeding the point where the bank loses focus of its primary business

Output:

We see that Kenyan banks’ non-interest income is set to benefit from new initiatives such as banc-assurance and mobile

banking. CfC Stanbic has the highest non-interest income as a percentage of revenue at 41.7%, while Housing Finance

has the lowest at 12.9%

• Camel Rating - This is a ranking system that assesses the overall condition of a bank, that is, Capital Adequacy, Asset

Quality, Management Quality, Earnings Quality and Liquidity. We also incorporated a governance score in the ranking

4646

B. Tier I Banks

4747

I. Barclays Bank

4848

Company Description

Barclays bank has been in operational in Kenya for over 97 years

Company Description

Pros Cons

• Barclays Bank has operated in Kenya for over 97 years• The bank listed its shares on the Nairobi Stock

Exchange in 1986• Before 2013, the bank was a subsidiary of Barclays

bank plc, an international financial servicesconglomerate

• In 2013, all Barclays plcs in Africa (Except Egypt andZimbabwe) were merged with the aim of operating asone bank in Africa, leading to the formation of BarclaysAfrica Group which now owns 68.5% of Barclays BankKenya

• As of 2014, the bank had 119 braches

• Diversification into other markets: The bank is looking

to expand into the SME banking, mortgage banking,

investment banking and bancassurance. Recently, the

bank set aside a Kshs 30 bn loans for SME's

• The bank has the highest net interest margin of 10.9%

as at Q3’2015

• Faster decision making and greater autonomy under

Barclays Africa Group Limited

• Stiff competition in the retail and SME banking market

• The bank will continue lagging its peers in the capture of

the retail market

• Challenges in deposit mobilisation compared to its peers

• Barclays Bank of Kenya (BBK) increased the fees itcharges its customers on credit card rates, raising thecharge to 3.9% from 3.7% on amounts used on the cardfor purchase of goods if not settled within the grace period

• BBK increased the minimum amount of unsecured loanscustomers running a small business can borrow to Kshs 6mn based only on their credit history, and the turnaroundtime to 48 hrs

• BBK has upgraded its ATMs to allow both account holdersand non-customers to make cash deposits in real-time,allowing deposits up to Kshs 120,000 per transaction inbatches of Kshs 40,000; with no limit on the number oftransactions they can make per day

Developments during the quarter

Source – Annual Reports and Q3’ 2015 Investor Brief

4949

Financial Statements Extracts

Barclays bank has an estimated 5-year PAT CAGR of 7.6%

201

3

Income Statement 2013 2014 2015e 2016e 2017e 2018e 2019e CAGR

Net Interest Income 18.9 19.6 20.7 23.4 25.0 27.2 29.7 8.6%

Non Funded Income 9.1 8.7 8.9 9.8 10.7 11.7 12.8 8.0%

Loan Loss Provision (1.2) (1.4) (1.4) (1.9) (2.1) (2.3) (2.5) 11.8%

Total Operating Expenses (16.0) (15.9) (17.1) (19.4) (21.0) (22.9) (25.0) 9.4%

Profit Before Tax 11.1 12.3 12.6 13.5 14.6 16.0 18.4 7.1%

Profit After tax 7.6 8.4 8.8 9.4 10.2 11.1 12.9 8.8%

% PAT Change YoY (12.8%) 10.7% 4.1% 7.8% 8.6% 9.2% 10.9%

CIR 52.9% 51.4% 53.1% 53.2% 53.2% 53.2% 53.1%

EPS 1.4 1.6 1.6 1.7 1.9 2.1 2.2

DPS 0.7 1.0 1.0 1.0 1.1 1.2 1.3

ROaE 24.6% 23.9% 24.2% 24.1% 26.2% 26.8% 28.6%

ROaA 3.9% 3.9% 3.8% 3.8% 3.9% 4.2% 4.2%

Balance Sheet 2012 2013 2014 2015e 2016e 2017e 2018e 2019e CAGR

Government Securities 47.5 47.6 55.3 60.3 65.7 71.6 78.1 55.3 6.4%

Net Loans and Advances 104.2 118.4 125.4 140.3 152.0 165.7 180.6 196.8 9.4%

Total Assets 184.9 206.8 237.10 237.1 259.1 283.2 309.3 337.9 8.4%

Customer Deposits 137.9 151.1 169.02 169.0 184.2 200.8 218.9 238.6 7.7%

Total Liabilities 155.2 174.4 187.7 203.2 221.4 241.4 263.1 286.8 8.9%

Shareholders Equity 29.6 32.4 38.2 33.9 37.7 41.8 46.2 51.1 6.0%

Book value Per share 5.4 6.0 7.0 6.2 6.9 7.7 8.5 9.4 6.0%

5050

Valuation Summary

Barclays bank is undervalued by with an upside of 23.6%

201

3

Cost of Equity Assumptions: 1st Dec 2015

Risk free rate * 12.6%

Beta 0.6

Country Risk Premium 6.0%

Extra Risk Premium 0.5%

Cost of Equity 16.5%

Terminal Assumptions:

Growth rate 5.0%

Mature Company Beta 1.0

Terminal Cost of Equity 19.1%

Return on Average Equity 30.0%

Justified Price to Book value 1.8x

Shareholder Equity - FY19e 51.9

Terminal Value 92.2

* Five years average yields on a 10 year Treasury bond

Valuation Summary: Implied Price Weighting Weighted Value

DDM- Integrated 15.6 80% 12.5

PBV Multiple 13.8 15% 2.1

PE Multiple 14.9 5% 0.7

Fair Value 15.3

Current Price 13.2

Upside/(Downside) 16.2%

Dividend Yield 7.4%

Total Upside(Downside) 23.6%

5151

II. Kenya Commercial Bank

5252

Company Description

Kenya Commercial Bank is the largest bank by asset base in Kenya

Company Description

Pros Cons

• Kenya Commercial Bank opened office in Kenya underthe name National Bank of India in 1904. It latermerged with Grindlays bank. After independence, thegovernment of Kenya acquired 100% ownership of thebank and renamed it Kenya Commercial Bank in 1970

• Kenya Commercial Bank is the biggest bank in Kenya,with: (i) Total assets of Kshs 607.3 bn, (ii) Totalcustomer deposits at Kshs 471.1 bn, (iii) Total loans atKshs 347.7 bn, (iv) Total shareholders funds Kshs 81.8bn;

• The bank has over 250 branches and more than 7 mncustomers

• KCB Mpesa, a partnership with Safaricom, is expectedto be a key growth driver for the bank in terms ofdeposits and loans

• Strong growth in alternative channels including mobilebanking and agency banking to enhance digitalpayments and more efficient delivery of services

• Launch of KCB Insurance to enhance integratedservice offerings on bancassurance and investmentbanking

• Exposure to different political, economic and regulatoryenvironments as the bank has regional subsidiaries indifferent countries hence is exposed to different changesin its operating environment

• The bank seems to be struggling in utilising its asset basecompared to its peers in generation of returns (e.g. ROaAat 3.8% as compared to Equity bank at 5%)


• KCB bank partnered with GoSwiff to facilitate mobilepayments through a high performance Bluetooth cardreader, targeting SMEs and merchants

• Global ratings agency S&P gave KCB Group a B+ creditrating with a stable outlook, then downgraded theoutlook to negative, following the downgrade of Kenya’ssovereign outlook to negative


5353


KCB has a high return on equity at 24%, and is one of the most profitable banks in Kenya

Income Statement 2013 2014 2015e 2016f 2017f 2018f 2019f CAGR



Loan Loss Provision 2.9 5.1 4.8 6.2 7.5 9.1 11.0 16.8%

Total Operating Expenses 30.0 34.2 36.3 47.5 57.4 69.4 83.5 19.6%


Profit After tax 14.3 16.9 18.6 22.6 27.4 33.5 39.7 18.7%

% PAT Change YoY 17.5% 17.5% 10.1% 21.9% 21.0% 22.5% 18.4%

CIR 60% 59% 59.5% 59.5% 59.5% 59.2% 59.6%

EPS 4.7 5.6 6.1 7.5 9.1 11.1 13.1

DPS 2.0 2.0 2.2 2.6 3.2 3.9 4.6

ROaE 24.4% 24.2% 23.8% 25.8% 26.4% 27.1% 26.9%

ROaA 3.8% 3.8% 3.4% 3.4% 3.4% 3.5% 3.5%

Balance Sheet 2013 2014 2015e 2016f 2017f 2018f 2019f CAGR

Net Loans and Advances 227.7 283.7 353.1 427.8 515.5 621.0 752.2 21.5%

Government Securities 47.5 61.1 74.5 89.4 109.3 131.2 149.4 19.6%

Total Assets 390.9 490.3 615.0 726.7 862.8 1027.2 1224.3 20.1%

Customer Deposits 305.7 377.3 480.5 576.6 691.9 830.3 996.3 21.4%

Borrowings 7.7 12.7 22.5 22.5 22.5 22.5 22.5 12.1%

Total Liabilities 327.5 414.7 534.8 631.8 750.1 892.8 1064.1 20.7%

Shareholders Equity 63.4 75.6 80.2 94.9 112.6 134.4 160.2 16.2%

Book value Per share 20.9 25.0 26.5 31.4 37.2 44.4 53.0 16.2%

5454

Valuation Summary

KCB is undervalued with an upside of 49.2%

Cost of Equity Assumptions: 1st Dec-15


Beta 0.9





Growth rate 5.0%




Justified PBV 1.6x


Terminal Value-(Year 2019) 249.4






Fair Value 58.3

Current Price 40.5


Dividend Yield 5.3%

Total Upside/(Downside) 49.2%

5555

III. Co-operative Bank

5656

Company Description

Co-op Bank embarked on its transformation agenda to sustain growth and improve customer experience

Company Description

Pros Cons

• Co-operative Bank was founded by Kenyan co-operativesocieties and unions well versed in the difficulties ofaccessing credit from existing banks

• As at October, it has a customer base of 5.4 mn and 143branches

• In 2014, Co-operative bank embarked on an ambitioustransformation journey called the Soaring EagleTransformation Agenda, in order to sustain and put thebank on a new trajectory for growth

• Co-op bank has: (i) Total assets of Kshs 332.9 bn, (ii)Totalcustomer deposits at Kshs 253.5 bn (iii)Total loans at Kshs212.4 bn, (iv) Total shareholders funds Kshs 49.4 bn;

• Co-operative Bank is the 3rd largest bank by asset size ofKshs. 333 billion and uses a unique model of wholesalebanking to over 15,000 cooperative societies

• The bank is following through on its transformationagenda, and is reaping the benefits that come with it

• Co-operative bank has a large Sacco banking base,and the opportunity to grow upon the model in itsregional expansion strategy

• Regional expansion that started with South Sudanwith a unique joint venture with the Government ofSouth Sudan

• Co-operative bank is a financial one-stop shop owingto its full range of financial services

• The bank is slow in embracing technology compared to itspeers in deposit mobilisation

• The bank might be losing out in first mover advantage intheir expansion strategy

• The bank seems to be stretched in Tier I capitalrequirements as compared to its peers


• Co-operative Bank of Kenya has partnered with digitalmoney transfer provider SimbaPay to offer internationalmoney transfer services, with SimbaPay being able to offerthe transactions for free as it gains from the forex trades

• Co-operative Bank of Kenya is set to receive USD 105 mn,Kshs 10.7 bn, in long term financing from theInternational Finance Corporation, which will be usedtowards bosting loans to small and medium enterprises

• Co-operative bank of Kenya, through its Co-opConsultancy Agency will issue motor vehicle insurancestickers in all its branches, and will offer insuranceservices of several insurance providers


5757

Financial Statement Extracts

Co-operative Bank improved its cost to income ratio and set to deliver solid growth in earnings







Profit After tax 9.1 8.0 10.9 12.5 14.4 16.9 19.3 19.3%

% PAT Change YoY 18.2% (12.0%) 36.1% 14.7% 15.2% 16.9% 14.7%

CIR 62% 63% 57.7% 56.8% 58.1% 58.3% 58.5%

EPS 1.9 1.6 2.2 2.6 2.9 3.4 4.0

DPS 0.4 0.5 0.6 0.7 0.8 1.0 1.1

ROaE 27.4% 20.0% 23.7% 23.5% 22.9% 22.7% 22.2%

ROaA 4.2% 3.1% 3.5% 3.4% 3.3% 3.3% 3.2%




Total Assets 231.2 285.4 344.3 402.0 473.9 552.9 647.0 17.8%


Borrowings 10.3 18.3 19.6 19.6 19.6 19.6 19.6 1.4%




5858

Valuation Summary

Co-operative Bank is fairly valued


Risk free rate* 12.6%

Beta 0.8




Terminal Assumptions:Growth rate 5.0%Mature Company Beta 1.0Terminal Cost of Equity 18.8%Return on Average Equity 22.2%Justified Price to Book Value 1.2xShareholder Equity - FY19e 94.2Terminal Value-(Year 2019) 116.9






Fair Value 17.8

Current Price 18.0

Upside/(Downside) (0.7%)

Dividend Yield 3.5%


5959

IV. Equity Bank

6060

Company Description

Equity bank is the largest bank in East Africa in terms of customer base

Company Description

Pros Cons

• Equity Group Holdings Limited was formed as EquityBuilding Society (EBS) in 1984. EBS was a provider ofmortgage financing for customers in the low incomepopulation

• As at Q3’2015, it had an asset base of Kshs 445.8 bnand shareholders' equity of Kshs 71.1 bn

• It has 228 branches across the region: (i) Kenya 166,Nairobi 45 (ii) Uganda 31, Kampala 17 (iii) South Sudan11, Juba 6 (iv) Tanzania 9, Dar-es Salaam 6 (v) Rwanda11, Kigali 5

• Equity Insurance Agency is currently the largestinsurance intermediary with revenues growing with aCAGR of 63.7% for the past 5 years

• Equity Investment Bank is the 2nd largest Stockbrokerin the country with a market share of 16%. They offera one day settlement for transactions

• Equitel is the fastest growing MVNO (Mobile VirtualNetwork Operator)

• Their agency banking platform is the fastest growingplatform outpacing both ATMs and branch transactionswith 46% of total transactions

• Cost control: In the short term, implementation ofEquity’s 3.0 strategy will impact negatively on their costto income ratio

• Exposure to different political, economic and regulatoryenvironments as the bank has regional subsidiaries indifferent countries hence is exposed to different changesin its operating environment

• The contribution of different subsidiaries does not reflectthe asset base of these subsidiaries

• Key man risk – the bank’s strategy is heavily reliant onthe current group CEO

Developments during the Quarter

• Equity finalized on the acquiscition of a 79.0% stake in

Pro-Credit Bank Congo. This was done through a share

purchase agreement where Equity bank issued

70,897,782 share to the sellers

• Equitel continues to grow its market share and

according to the Q2’2015 report by CAK, Equitel’s

market share increased to 2.4% from 1.9%


6161

Financial Statements ExtractsEquity bank has a high return on equity of 30%

Source – Company Financials

2013 2014 2015e 2016e 2017e 2018e 2019e CAGRIncome Statement

Net Interest Income 26.5 29.2 33.0 39.9 47.6 57.3 69.0 18.8%Non Funded Income 15.4 18.5 23.8 29.6 36.7 45.6 57.0 25.3%Loan Loss Provision 2.4 1.6 2.2 2.3 2.8 3.4 4.0 20.5%Total Operating Expenses 22.7 26.3 30.4 38.2 46.0 55.7 67.6 20.7%Profit Before Tax 19.0 22.4 26.4 31.3 38.2 47.1 58.4 21.2%Profit After tax 13.3 17.2 18.5 21.9 26.7 33.0 40.9 19.0%% PAT Change YoY 29.2% 7.8% 18.6% 21.9% 23.4% 23.8%EPS 3.6 4.6 5.0 5.9 7.2 8.9 11.0 DPS 1.5 1.8 2.0 2.4 2.9 3.6 4.4 Cost to Income 48.8% 52.0% 49.7% 51.5% 51.3% 50.9% 50.4%ROaE 28.1% 29.7% 27.8% 28.9% 29.5% 30.4% 31.3%ROaA 5.1% 5.5% 4.6% 4.5% 4.6% 4.8% 5.0%

2013 2014 2015e 2016e 2017e 2018e 2019e CAGRBalance Sheet

Net Loans and Advances 171.4 214.2 265.5 318.6 382.3 458.8 550.6 20.8%Government Securities 44.6 48.4 49.8 59.7 71.7 86.0 103.2 16.4%Total Assets 277.7 344.6 452.3 532.5 629.0 745.3 885.7 20.8%Customer Deposits 194.6 245.4 331.9 398.3 477.9 573.5 688.2 22.9%Total Liabilities 226.2 280.8 382.8 449.9 530.3 626.9 742.7 21.5%Shareholders Equity 51.6 63.8 69.4 82.6 98.6 118.4 143.0 17.5%Book value Per share 13.9 17.2 18.7 22.3 26.6 32.0 38.6 17.5%% Change in BPS YoY 24% 9% 19% 19% 20% 21%

6262

Valuation Summary

Equity bank is undervalued with an upside of 23.1%


Risk free rate* 12.6%

Beta 0.8





Growth rate 5.0%




Justified Price to Book Value 1.8x





DDM- Integrated 54.3 80.0% 43.4

PBV Multiple 29.3 15.0% 4.4

PE Multiple 32.4 5.0% 1.6

Fair Value 49.4

Current Price 41.8


Dividend Yield 4.8%


6363

V. Standard Chartered Bank

6464

Company Description

Standard Chartered Bank is one of the oldest bank in Kenya formed in 1910

Company Description

Pros Cons

• Standard Chartered Bank was formed in 1910 and

became listed on the NSE in 1989

• The bank currently operates 37 branches

• As at Q3’2015, the bank had assets in excess of Kshs

231.6 bn and shareholders’ funds amounting to Kshs

41.5 bn

• Diversification – The bank approved the setting up and

operationalisation of the bancassurance business to be

carried out by Standard Chartered Insurance Agency

Limited, which will lead to diversification of their

revenues through a diversified product portfolio

• Custody business will continue providing the bank with

a niche when it comes to wholesale banking

• Strong in SME banking business

• Recently high non performing loans have affected the

revenues for Standard Chartered Bank. Their NPL/Total

loans was at 8.5% which is above the industry average of

5.5%

• The recent mass sale of mortgage products might have

taken the bank out of their niche market

• Activities are limited to the Kenyan market as the parent

company prefers to operate independently in other

markets


• Standard Chartered has partnered with Safaricom to

introduce a platform that allows business customers

and M-PESA agents using the Lipa na Mpesa service to

convert their e-value to cash in real time


6565


Standard Chartered has a high return on equity of 27%


2013 2014 2015e 2016e 2017e 2018e 2019e CAGR

Income Statement






Profit After tax 9.3 10.4 7.4 10.0 11.6 13.3 15.0 7.5%

% PAT Change YoY 14.9% 12.5% -29.2% 35.7% 15.6% 14.8% 12.4%

EPS 30.0 33.8 23.9 32.5 37.5 43.1 48.4

DPS 15.0 12.8 10.8 14.6 16.9 19.4 21.8

Cost to Income 44.0% 45.0% 52.3% 47.4% 47.0% 46.7% 46.8%

ROaE 27.7% 27.2% 18.3% 23.8% 24.2% 24.3% 23.9%

ROaA 4.5% 4.7% 3.1% 4.0% 4.2% 4.3% 4.3%

2013 2014 2015e 2016e 2017e 2018e 2019e CAGR

Balance Sheet



Total Assets 220.4 222.5 238.9 258.4 290.5 326.9 368.0 10.6%





% Change in BPS YoY 12.3% -3.3% 14.0% 14.2% 14.3% 14.1%

6666

Valuation Summary

Standard Chartered Bank is undervalued with an upside of 14.5%



Adjusted Beta 0.8





Growth rate 5.0%









DDM- Integrated 248.3 80.0% 149.0

PBV Multiple 227.3 15.0% 56.8

PE Multiple 226.9 5.0% 22.7

Fair Value 228.5

Current Price 209.0


Dividend Yield 5.2%


6767

Valuation Summary – Tier I Banks

Tier I banks on average presents an upside of 20.4%

Capital Adequacy Equity Barclays KCB Stanchart Co-op Bank Minimum Statutory

Core Capital to Total Liabilities 20.5% 22.0% 16.7% 19.7% 16.4% 8.0%

Core Capital to RWA 14.8% 16.3% 13.9% 17.3% 14.2% 10.5%

Total Capital to RWA 16.6% 19.1% 15.6% 21.7% 21.2% 14.5%

Company Name PriceIssued Shares

Market Cap

P/E Dividend YieldPEG CoE Fair Value Upside

TTM FY 2014 FY 2015e

Equity Bank 41.8 3.7 154.7 8.2 4.2% 4.8% 0.5 18.3% 49.4 23.0%

Barclays Bank 13.2 5.4 71.0 8.3 7.8% 7.4% 0.9 16.5% 15.3 23.6%

KCB 40.5 3.0 121.5 6.7 4.3% 5.3% 0.4 18.2% 58.3 49.3%

Standard Chartered 209.0 0.3 62.7 7.7 5.3% 5.2% 1.6 18.1% 205.7 3.6%

Co-operative Bank 18.0 4.9 88.2 8.5 2.8% 3.5% 0.5 17.5% 17.8 2.5%

Min 6.7 2.8% 3.5% 0.4 16.5% 15.3 2.5%

Median 8.2 4.3% 5.2% 0.5 18.1% 49.4 23.0%

Average 7.9 4.9% 5.2% 0.8 17.7% 69.3 20.4%

Max 8.5 7.8% 7.4% 1.6 18.3% 205.7 49.3%

6868

C. Tier II Banks

6969

I. National Bank of Kenya

7070

Company Description

National Bank’s largest shareholder is NSSF with a 48.1% stake

Company Description

Pros Cons

• National Bank was incorporated in 19th June 1968 but

officially opened on November 14th 1968. At the time it

was fully owned by the government

• As at Q3’2015 the bank had assets totaling 118.1 bn

and Shareholder funds in excess of Kshs 13.5 bn

• It currently has 75 branches across Kenya

• Introduction of Islamic Banking that capitalized on the

unbanked Islam community contributing to deposit

growth

• The introduction of bancassurance and custodial

services has seen the bank diversify its revenue

• Branch expansion – in 2014 NBK opened 15 branches

that saw the bank grow its deposits

• High cost of funds. Despite NBK serving retail customers, it

has maintained high cost of funds averaging 5.4% thus

leading to lower NIMs of 8.6%

• NBK has the worst loan book among the listed banks with

an NPL/Total loan ratio of 8.9%

• Low NPL coverage of 8.9%, despite having the highest

NPLs

• Despite being associated with the Government, the bank is

slow in county expansion



• NBK’s plan to have a Kshs. 13.0 bn via rights issue has

received further delay after parliament denied

Treasury’s allocation of Kshs. 49 bn to the cash call

• NBK announced plans to sell more of its non core

assets after realizing Kshs. 1.2 bn from the sale of

assets. This move was to raise additional capital and

reduce exposure to real estate as they do not earn

optimum profit

7171


National Bank has a low return on equity of 7%



Net Interest Income 5.6 6.8 6.5 7.2 7.4 8.0 8.5 4.6%Non Funded Income 2.9 3.1 4.4 4.0 4.2 4.5 4.8 8.9%Loan Loss Provision 0.3 0.5 0.8 1.0 1.0 1.1 1.2 17.0%Total Operating Expenses 6.7 7.5 7.9 9.2 9.4 10.0 10.7 7.4%Profit Before Tax 1.8 1.3 2.9 2.1 2.3 2.4 2.6 14.7%Profit After tax 1.1 0.9 2.0 1.5 1.6 1.7 1.8 15.8%% PAT Change YoY 52.5% -21.8% 132.6% -27.7% 8.3% 6.8% 6.9% 15.8%EPS 4.0 3.1 7.2 5.2 5.7 6.1 6.5 DPS - - - - - - -Cost to Income 75.3% 70.2% 65.4% 72.8% 71.9% 71.9% 71.9%ROaE 10.0% 7.2% 15.9% 10.5% 10.2% 9.9% 9.6%ROaA 1.4% 0.8% 1.7% 1.2% 1.2% 1.2% 1.2%


Net Loans and Advances 39.6 65.6 74.6 74.8 80.0 85.6 91.6 6.9%Government Securities 27.5 30.3 27.4 29.3 31.4 33.6 35.9 3.5%Total Assets 92.6 123.1 120.0 128.4 137.5 147.1 157.5 5.0%Customer Deposits 78.0 104.7 94.5 101.1 108.1 115.7 123.8 3.4%Total Liabilities 80.7 110.9 106.7 113.7 121.1 129.1 137.6 4.4%Shareholders Equity 11.9 12.2 13.3 14.7 16.3 18.0 19.8 10.2%Book value Per share 42.5 43.7 47.4 52.7 58.3 64.4 70.9 10.2%

7272

Valuation Summary

National Bank is fairly valued with an upside of 3.4%

*Five years average yield on a 10 year Treasury bond

Cost of Equity Assumptions: 3-Dec-15


Beta 0.7




Terminal Assumptions:Growth rate 5.0%Mature Company Beta 1.0Terminal Cost of Equity 18.6%Return on Average Equity 9.6%Justified Price to Book value per share 0.3xPreference Shares 5.7


Residual Income 14.4 80.0% 11.5

PBV Multiple 22.6 15.0% 3.4


Fair Value 16.1 Current Price 15.6

Upside/(Downside) 3.4%Dividend Yield 0.0%


7373

II. CfC Stanbic Bank

7474

Company Description

CfC Stanbic Holdings’ majority shareholder is the Stanbic Africa Holdings (UK)

Company Description

Pros Cons

• CfC Stanbic Holdings was listed in NSE on April 2011

• This comes after CfC Stanbic Limited and CfC holdings

limited merged and demerged from the CfC insurance

holdings limited (later became Liberty Holdings)

• As at Q3’15, CfC had assets in excess of Kshs. 208.2 bn

and shareholder’s funds of Kshs. 269 bn

• As at Q3’15, the bank operates 24 branches and is

planning to open 1 more branch in the year

• The Corporate and Investment banking is a key driver

for CfC Stanbic revenue as it contribute to 64% of the

banks total income

• CfC is a one stop financial services shop offering

investment banking, custodial and brokerage services

• The recent launch of their mobile banking platform is

set to reduce costs associated with branch transactions

• Political Instability in the countries they operate. The

recent instability in S.Sudan proved to be a challenge as it

affected their overall income

• Their expansion strategy is limited by the presence of

Standard Bank in the region

• Lack of operational efficiency owing to a high cost to

income ratio of 59.0%, which is the highest among listed

banks as at June


• CfC Stanbic Bank announced they have signed both a 2

year and a 3-year USD 155.0 mn loan to fund the bank’s

core business. The facility is priced at 245 basis points

over the London Interbank Offered Rate (LIBOR) for the

2-year tenor and 290 basis points over LIBOR for the 3-

year tenor


7575


CfC Stanbic has a return on equity of 23%


Net Interest Income 7.5 8.4 7.0 10.4 12.6 14.6 16.4 14.4%Non Funded Income 8.5 8.2 9.5 10.7 12.0 13.4 14.8 12.6%Loan Loss Provision 0.9 0.8 1.0 1.1 1.3 1.5 1.7 15.5%Total Operating Expenses 8.8 8.9 10.8 13.1 15.1 17.3 19.3 16.6%Profit Before Tax 7.2 7.6 5.7 8.0 9.4 10.7 12.0 9.4%Profit After tax 5.1 5.7 4.0 5.6 6.6 7.5 8.4 7.9%% PAT Change YoY 51% 11% -30% 39% 18% 13% 12%EPS 13.0 14.5 10.2 14.1 16.7 18.9 21.2 DPS - - - - - - - -Cost to Income 49.6% 49.1% 59.4% 56.8% 56.3% 56.5% 56.4% 2.8%ROaE 25.4% 23.3% 14.7% 18.0% 17.8% 17.0% 16.1% -7.1%ROaA 3.4% 3.3% 2.0% 2.3% 2.4% 2.5% 2.5% -5.8%


Net Loans and Advances 69.1 88.3 106.6 119.9 137.9 158.5 172.2 14.3%Government securities 48.4 28.1 17.4 33.3 38.3 44.0 50.6 12.5%Total Assets 170.7 171.3 229.3 260.9 285.4 319.9 354.7 15.7%Customer Deposits 95.7 96.8 115.8 133.2 153.2 176.2 202.6 15.9%Total Liabilities 148.4 144.7 201.2 227.2 245.1 272.1 298.5 15.6%Shareholders Equity 22.4 26.6 28.1 33.7 40.3 47.8 56.2 16.1%Book value Per share 56.5 67.4 71.1 85.2 101.9 120.9 142.1 16.1%

7676

Valuation Summary

CfC Stanbic is overvalued by 8.7%



Beta 0.7





Growth rate 5.0%




Persistency Factor 0.7




Residual Income 77.8 80.0% 62.2

PBV Multiple 81.4 15.0% 20.4


Fair Value 77.2 Current Price 84.5

Upside/(Downside) (8.7%)Dividend Yield 0.0%

Total Upside/(Downside) (8.7%)

7777

III. NIC Bank

7878

Company Description

NIC bank is fairly liquid owing to the counter’s 48% free float

Company Description

Pros Cons

• NIC Bank (formerly National Industrial Credit BankLimited) was incorporated in Kenya on 29th September1959 as a joint venture between Mercantile Credit Limitedand Standard Bank. NIC Bank was among the first non-bank financial institutions to provide hire purchase andinstalment credit finance facilities in Kenya

• In early 2015, NIC Leasing LLP, a partnership betweenNIC Bank Limited and Mercantile Finance Limited, wasincorporated to undertake direct operating lease business.The leasing product is available for Small and Medium sizeenterprises (SME’s), Corporates and both County andCentral Government

• As at October 2015, NIC has: (i) total assets of Kshs155.6 bn, (ii) Total customer deposits of Kshs 105.8 bn(iii) Total loans at Kshs 111.2 bn (iv) Total shareholdersfunds at Kshs 23.9 bn

• Well developed IT network T24, that enables the bankto centralize operations across its subsidiaries

• NIC bank partnered with Post Bank Limited to offerAgency Banking services, allowing NIC customers todeposit or withdraw cash from any of the 102 PostBank branches countrywide

• NIC bank has maintained its pole positioning in assetfinancing and curved a niche in the market

• Traditional SME market now being targeted by Tier 1banks, hence it’s market share is under threat

• NIC has a high cost of funding at 5.4%, due to heavyreliance on corporate deposits, resulting in a compressionof the bank’s net interest margins

• Exposure to different political, economic and regulatoryenvironments, especially Tanzania with their upcomingelections might slow down business


• NIC Bank and the African Trade Insurance Agency haveagreed to extend their SME loan cover agreementallowing the bank to keep lending to enterprisecustomers.

• Under the agreement, NIC lends up to USD 5 mn perclient; with ATI able to cover single obligations worth upto USD 50 mn


7979


NIC bank has an average return on equity of 21%







Profit After tax 3.2 4.1 4.9 5.7 6.5 7.4 8.5 15.5%

% PAT Change YoY 7% 27% 19.7% 15.7% 14.0% 13.9% 14.2%

CIR 52% 46% 49.2% 47.2% 47.2% 47.2% 47.3%

EPS 5.1 6.4 7.7 8.9 10.1 11.6 13.2

DPS 0.6 1.0 1.2 1.3 1.5 1.7 2.0

ROaE 20.1% 20.6% 20.8% 21.1% 20.2% 19.5% 18.9%

ROaA 2.8% 3.1% 3.3% 3.4% 3.4% 3.4% 3.4%



Government Securities 18.1 19.2 10.8 12.5 14.3 16.5 18.9 (0.3%)

Total Assets 121.1 145.8 156.4 177.5 202.2 230.6 263.2 12.5%


Borrowings 3.6 14.4 16.0 16.0 16.0 16.0 16.0 2.2%




8080

Valuation Summary

NIC bank has an upside of 18.1%



Beta 0.8

Mature Market Risk Premium 6.0%



Terminal Assumptions:Growth rate 5.0%Mature Company Beta 1.0Terminal Cost of Equity 19.1%Return on Average Equity 18.9%Justified Price to Book value 1.0xShareholder Equity - FY19e 48.4 Terminal Value-(Year 2019) 47.7






Fair Value 49.6

Current Price 43.0


Dividend Yield 2.7%


8181

IV. Diamond Trust Bank

8282

Company Description

DTB has continued to focus on investing in alternative channels to drive growth

Company Description

Pros Cons

• Diamond Trust Bank (DTB) has operated in East Africafor over 70 years, with a focus on the SME sector

• The bank currently has the following subsidiaries:• DTB Tanzania Ltd• DTB Uganda Ltd• DTB Burundi• Diamond Trust Insurance Agency Ltd• Premier savings and finance Ltd• Network Insurance Agency Ltd

• As of 2014, the bank had a total of 110 branches



• Strong backing from financing partners, i.e. Aga KhanFund for Economic Development and Habib bank

• Strong performance of subsidiaries: The regionalsubsidiaries in Tanzania, Uganda and Burundicontribute approx. 25% of the group’s PAT

• Partnerships to drive NFI growth: DTBK has partneredwith Nakumatt and Master Card to create theNakumatt Global MasterCard which allows users to paybills, facilitate cash withdrawals and deposits, engagein forex trading and money transfers

• Traditional SME market now being targeted by tier I bankshence market share under threat

• Exposure to different political, economic and regulatoryenvironments, especially Tanzania with their upcomingelections might slow down business and high country risk intargeted expansion regions such as DRC

• DTB and KCB have been picked by the KDIC with the

endorsement of the CBK, as agents to disburse funds to

depositors of Imperial Bank Limited, in receivership

• DTB bank is launching Huduma Card, which will support

payments for all services within Huduma centers and

consequently to be used as a government payment

platform for all rendered services

8383


DTB has an estimated 5-year PAT CAGR of 18.4%


2013 2014 2015e 2016e 2017e 2018e 2019e CAGR

Income Statement




Total Opex (7.2) (8.1) (11.8) (15.4) (18.2) (21.5) (25.4) 25.7%


Profit After tax 5.2 5.7 6.4 8.1 9.6 11.3 13.3 18.4%

% PAT Change YoY 29% 9% 12% 26% 18% 18% 18%

EPS 21.6 23.6 25.9 28.3 30.6 36.6 43.8

DPS 2.1 2.4 2.6 2.8 3.1 3.7 4.4

Cost to Income 43.3% 43.4% 49.5% 49.9% 49.8% 49.8% 49.8%

ROaE 27.9% 22.8% 20.6% 22.9% 23.9% 24.7% 25.5%

ROaA 3.5% 3.0% 2.7% 3.2% 3.3% 3.5% 3.6%

2013 2014 2015e 2016e 2017e 2018e 2019e CAGR

Balance Sheet



Total Assets 166.5 211.5 255.5 292.0 345.3 408.1 482.3 17.9%




Book value Per share 86.7 119.6 137.9 163.4 191.0 224.0 263.4

8484

Valuation Summary

DTB’s stock is undervalued with an upside of 23.8%




Adjusted Beta 0.6




Terminal Assumptions:Growth rate 5.0%

Mature Company Beta 1.0Terminal Cost of Equity 19.1%Return on Average Equity 25.5%Justified Price to Book Value 1.5x



Valuation Summary: Implied Price Weighting Weighted ValueDDM 283.3 80.0% 226.7 PBV Multiple 86.6 15.0% 13.0 PE Multiple 129.2 5.0% 6.5

Fair Value 246.1 Current Price 201.0 Upside/(Downside) 22.4%Dividend yield 1.3%Total return 23.8%

8585

V. HF Group

8686

Company Description

HF Group is the country’s mortgage service provider with mandate in property development

Company Description

Source – Annual Reports and H1’ 2015 Investor Brief


Pros Cons

• HF Group (Formerly Housing Finance Company ofKenya) was incorporated on 18th of November 1965and is the premier mortgage Finance Institution inKenya licensed under the Banking Act

• The HF Group started operations in 1966 with the mainobjective of implementing the government’s policy ofpromoting thrift and home ownership by providingsavings and mortgage facilities to the Kenyan public

• In August 2015 the Company establish a non-operatingholding company and rebranded to HF Group limitedwith subsidiaries (i) HFC Limited; (ii) HFDI (PropertyDevelopment and Investment Solutions); (iii) HFInsurance Agency; and (iv) HF Foundation

• Revival of Kenya building society. This is an advantagefor HF since in addition to providing mortgage financing,it can also develop the houses, hence additional revenuestreams

• Vibrant real estate market in Kenya with an annualhousing supply which does not satisfy demand,especially in the middle and lower income segment

• The bank is the market leader in provision of mortgagefinancing

• Lack of a vibrant mortgage market in Kenya

• Competition from larger banks with Mortgage facilitiesposes a risk for growth

• Low diversification as evidenced by the low percentage ofnon interest income to total revenue at 12.9% which isthe lowest among the listed banks

• Asset liability mismatch which forces the bank to resort toexpensive financing

• HF Group marked its 50thJubilee Anniversary in

November 2015, whilst unveiling an ambitious growth

strategy dubbed the Vision 2020

• The bank has signed a memorandum of understanding

with the Kakamega County Government to put up 1,000

housing units, providing both construction financing and

mortgages on the same units

8787


HF Group is expected to return a compounded net earnings growth of 10.9%






Total Operating Expenses (2.4) (2.5) (3.0) (3.4) (4.1) (4.8) (5.8) 18.5%


Profit After tax 1.0 1.0 1.0 1.1 1.3 1.4 1.6 10.9%% PAT Change YoY -2.0% 2.8% 9.3% 15.3% 14.6% 13.1%

EPS 0.0 0.0 0.0 0.0 0.0 0.0 0.0

DPS 1.2 1.0 1.2 1.3 1.5 1.7 1.9 Cost to Income 55.1% 49.2% 53.6% 54.1% 54.3% 55.0% 56.2%ROaE 18.1% 15.7% 12.0% 10.5% 11.3% 12.1% 12.7%ROaA 2.3% 1.8% 1.6% 1.5% 1.5% 1.4% 1.4%

` 2013 2014 2015e 2016e 2017e 2018e 2019e CAGRBalance Sheet



Total Assets 47.4 61.0 68.2 79.5 93.8 110.9 131.4 16.6%




Book value Per share 16.9 18.9 29.1 31.0 33.2 35.7 38.5

8888

Valuation Summary

HF Group is overvalued with a downside of 7.8%



Adjusted Beta 0.9





Mature Company Beta 1.0Terminal Cost of Equity 18.%Return on Average Equity 12.7%Justified Price to Book Value 0.6x





Fair Value 19.8 Current Price 22.8 Upside/(Downside) -12.8%Dividend yield 5.1%Total return (7.8%)

8989

VI. I&M Holdings

9090

Company Description

I&M has acquired Giro commercial bank in a growth strategy driven by synergy



Pros Cons

• I&M Bank was founded in 1974 as a financial servicescompany and later converted to a commercial bank in1996

• I&M Bank is a the flagship company of the I&M Groupof Companies that has a major presence in banking(I&M) and insurance (GA), manufacturing and realestate

• In 2013 I&M Bank’s shareholders exchanged theirshares for those of City Trust in a reverse takeoverenabling I&M share to be publicly traded

• I&M Bank’s international network includes Bank OneLimited in Mauritius, I&M Bank Tanzania Limited andBanque Commerciale du Rwanda

• Quality loan book: The bank has low NPLs of approx.2.3%

• Regional expansion: The bank has plans to expand intoUganda and increase their bank branches in Kenya,having opened 9 more branches in 2014

• Revenue diversification: I&M introduced bank assurancein 2014

• Acquisition of Giro bank set to boost its client reachhence growth

• Traditional SME market now being targeted by tier 1

banks hence market share under threat

• Low branch network in other counties in Kenya other than

Nairobi

• Exposure to different political, economic and regulatory

environments, especially Tanzania with their upcoming

elections might slow down business

Company Description

• I&M has recently acquired Giro commercial bank,

helping it to grow its client base and reach

• The bank is still on an expansion strategy to grow its

network

9191


I&M bank has an estimated 5-year PAT CAGR of 15.2%


2013 2014 2015e 2016e 2017e 2018e 2019e CAGRIncome StatementNet Interest Income 8.8 9.1 10.8 12.2 13.8 16.0 18.5 15.3%Non Funded Income 3.6 3.1 3.7 4.3 5.0 5.7 6.5 16.4%Loan Loss Provision 0.4 0.8 1.1 1.3 1.1 1.3 1.4 12.8%Total Operating Expenses 5.1 4.8 6.1 7.1 7.7 8.7 9.9 15.6%Profit Before Tax 7.3 7.5 8.4 9.5 11.1 13.0 15.2 15.2%Profit After tax 5.0 5.2 5.9 6.6 7.8 9.1 10.6 15.2%% PAT Change YoY 20.9% 5.1% 12.8% 12.4% 17.2% 17.0% 16.7%Cost to Income 38.2% 33.1% 34.1% 35.1% 34.8% 34.2% 33.8%EPS 12.7 13.3 15.0 16.9 19.8 23.2 27.1DPS 2.1 2.6 2.7 3.0 3.6 4.2 4.9ROaE 25.1% 23.9% 23.3% 20.9% 20.6% 20.3% 20.1%ROaA 3.8% 3.5% 3.5% 3.2% 3.1% 3.2% 3.2%

Balance Sheet 2013 2014 2015e 2016e 2017e 2018e 2019e CAGR


Net Loans and Advances 91.9 101.6 123.3 151.6 175.9 204.0 236.6 18.4%Total Assets 141.4 154.2 187.7 228.7 265.5 308.2 357.9 18.3%

Customer Deposits 97.1 99.2 123.3 151.6 175.9 204.0 236.6 19.0%Borrowings 11.6 14.3 17.4 21.3 24.6 28.5 33.0 18.1%Total Liabilities 117.5 131.7 158.0 193.5 223.8 259.0 299.8 17.9%



9292

Valuation Summary

I&M bank is undervalued with an upside of 12.6%



Adjusted Beta 0.7





Mature Company Beta 1.0Terminal Cost of Equity 18.8%Return on Average Equity 20.1%Justified Price to Book Value 1.1x





Fair Value 108.8 Current Price 99.0 Upside/(Downside) 9.9%Dividend yield 2.7%Total return 12.6%

9393

Valuation Summary – Tier II Banks

Tier II banks on average presents an upside of 6.9%

Capital Adequacy I&M NIC NBK DTB CfC HFMinimum Statutory

Core Capital to Total Liabilities 20.0% 20.6% 12.5% 22.0% 20.9% 20.7% 8.0%

Core Capital to RWA 15.4% 13.9% 14.5% 14.4% 15.9% 15.8% 10.5%

Total Capital to RWA 17.7% 19.8% 15.4% 17.5% 19.0% 18.6% 14.5%

Company Name PriceIssued Shares

Market Cap

P/E Dividend YieldPEG CoE Fair Value Upside

TTM FY 2014 FY 2015e

I&M Bank 99.0 0.4 39.6 7.0 2.1% 2.7% 0.4 16.7% 108.8 12.6%

NIC Bank 43.0 0.6 25.8 6.3 2.1% 2.7% 0.4 17.7% 49.6 18.1%

National Bank 15.6 0.3 4.7 2.1 0.0% 0.0% 0.2 17.0% 16.1 3.5%

DTB 201.0 0.2 48.2 8.0 1.2% 1.3% 0.4 16.5% 246.1 23.7%

CfC 84.5 0.4 33.8 7.7 0.0% 0.0% 1.4 18.0% 77.2 (8.7%)

HF 22.8 0.4 8.0 7.4 4.6% 5.1% 0.7 18.2% 19.8 (7.9%)

Min 2.1 0.0% 0.0% 0.2 16.5% 16.1 (8.7%)

Median 7.2 1.7% 2.0% 0.4 17.3% 63.4 8.0%

Average 6.4 1.7% 2.0% 0.6 17.3% 86.3 6.9%

Max 8.0 4.6% 5.1% 1.4 18.2% 246.1 23.7%

9494

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